354. Can Property Management Kill Your STR Loophole? (And Other Costly Mistakes)

Summary

Tax Smart Real Estate Investors Podcast

Episode 354: Can Property Management Kill Your STR Loophole? (And Other Costly Mistakes)
Hosts: Hall CPA Team (Tom & Nate)
Date: November 18, 2025
Duration: Approx. 33 minutes

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Overview

This episode dives into the practical tax and accounting questions facing real estate investors as year-end approaches, with a strong focus on short-term rental (STR) tax strategies, bonus depreciation deadlines, and the nuances that can trip up even savvy investors. Tom and Nate field real questions sourced from their Facebook group and insider community, emphasizing actionable advice on cost segregation, the STR loophole, managing hours for real estate professional status, and common mistakes that could derail your tax planning.

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Key Discussion Points & Insights

1. Depreciation on Schedule E Rentals (02:12)

• Issue: Listener's tax preparer insists on skipping depreciation for a rental property.
• Takeaway:
  • If a property is rented full-time during the tax year, you must take depreciation—it’s not optional.
  • Not doing so is a major error by the preparer and can cause IRS issues later.
  • If your preparer refuses, "insist on finding another tax preparer." (Tom, 04:01)

2. Cost Segregation Timing for Year-End Purchases (04:41)

• Do you need to do it before year-end?
  • No. Complete the cost segregation study before filing your tax return (ideally before April 15th for individual filers).
  • Quote: "If you want to claim on 2025 tax return, you just gotta have it in hand... preferably before April 15th." (Nate, 04:41)

3. 2025 Bonus Depreciation "Weird Timing" Explained (05:29)

• Key Dates/Rules:
  • If you close before Jan 20th, 2025, you're likely stuck at 40% bonus depreciation.
  • A binding contract signed before Jan 20th (but not closed) allows for 100% bonus depreciation, if no penalties for walking away.
  • If construction begins and >10% of costs are incurred before Jan 20th, you’re also under the 40% rule—but there are technical exceptions.
  • Memorable Example: "Someone who closed on January 19th would not be eligible [for 100% bonus], someone who closed January 28th would." (Nate, 06:24)

4. Seller’s Post-Close Occupancy Impacting STR Loophole (09:19)

• Scenario: Buying STR in November, seller stays post-close briefly.
• Insight:
  • Seller occupancy post-closing counts as rental days, not personal use.
  • This can inflate your average rental duration and potentially disqualify you from STR loophole for the year.
  • "You're just going to be stuck probably with a long term or midterm rental for that year." (Nate, 10:11)

5. Short-Term Rental (STR) vs. Real Estate Professional Hours (11:14)

• Clarification: STR hours can count towards the 750-hour real estate professional (REP) test.
• Critical nuance:
  • REP status alone does not make long-term rental losses non-passive—you must also materially participate in the long-term rentals specifically (often via 500+ hours).
  • STR material participation is separate from long-term rental material participation.
  • Analogy: "It's like all bourbon is whiskey, but not all whiskey is bourbon." (Nate, 13:47)

6. Syndication Losses: When Are They Active? (15:56)

• Activating syndication losses:
  • Must qualify as a real estate professional and materially participate (500+ hours) in your personal long-term rentals.
  • Then, with a grouping election, syndication losses can be active.
  • "You always need to do that. It's not an easy test… but it is achievable." – Tom (17:57), Nate (18:31)

7. Can Property Management Kill Your STR Loophole? (18:56)

• Myth: You cannot use the STR loophole if there’s a property manager.
• Reality: It’s almost always true—it becomes nearly impossible to prove material participation if you're not self-managing due to lack of qualifying hours.
  • "Maybe 2% of cases... but 98%? Probably more like 99%. No, you're not going to be able to do that." (Nate, 18:56)

8. Kids Working For Your Real Estate Business (21:06)

• Can you pay a child under 14 for work?
  • Yes, but they can only do age-appropriate, legitimate work (e.g., cleaning, simple tasks), at a reasonable rate (minimum wage).
  • Must document, pay, and file W-2s; ideally keep it under the standard deduction (~$14,000) to make it tax-free for the child.

9. Bonus Depreciation for Condos (22:26)

• Do you get full depreciation since you “don’t own the land”?
  • No. You almost always own a fractional interest in the land, which must be allocated and not depreciated.
  • Still, the majority of the condo price can often be depreciated, but never 100%.

10. Medium-Term Rental—Substantial Services Requirement (24:23)

• Qualifying as “active” for stays over 7 days but under 30:
  • You must actually provide substantial services (e.g., daily cleaning, meal prep, concierge, laundry).
  • Key: Offering isn’t enough; services must be provided.
  • "If you, if you read it, it says they’re going to look at the continuity and the frequency... they need to actually be rendered." (Tom, 24:23)

11. Year-End Tax Planning: What Actually Matters (27:48, 29:37, 31:34)

• Top Reminders:
  • Track material participation hours now—don’t wait until January.
  • Consider “bunching” charitable donations for bigger deductions.
  • 401k and retirement contributions can move the needle.
  • Don’t force last-minute investments for the tax break—bonus depreciation isn’t disappearing soon.
    • Quote: "Don’t make bad investments just to try to get some tax benefits before year end. Take a deep breath..." (Tom, 30:49)

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Notable Quotes & Memorable Moments

• Depreciation is Non-Negotiable:
  "If they insist on not taking it, then I would insist on finding another tax preparer. That’s the harsh truth right there."
  — Tom (04:01)

• STR Property Management Warning:
  "Maybe 2% of cases that I’ve seen actually can make it work... but 99%, no."
  — Nate (18:56)

• STR/REP Analogy:
  "All bourbon is whiskey, but not all whiskey is bourbon."
  — Nate comparing material participation and REP hours (13:47)

• Year-End Reassurance:
  "Take a deep breath, realize that next year, bonus depreciation still here..."
  — Tom (30:49)

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Timestamps for Key Segments

• [02:12] Depreciation on Schedule E Explained
• [04:41] Cost Seg Timing for Tax Year
• [05:29] January 20th, 2025 Bonus Dep Limits
• [09:19] STR with Seller Occupancy: Effects
• [11:14] STR/REP/Material Participation Hours
• [15:56] Making Syndication Losses Active
• [18:56] Does Property Management Kill STR Loophole?
• [21:06] Paying Kids For Real Estate Work
• [22:43] Condo Depreciation Myths
• [24:23] Substantial Services for Medium-Term Rentals
• [27:48] Year-End Preparation Musts
• [29:37]/[31:34] Should You Rush Year-End Deals or Wait?

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Final Takeaways

• Material participation and documentation are everything in STR/REP strategies: Without proper evidence and hour tracking, you lose critical tax benefits.
• Using property management almost always disqualifies you from the STR loophole—at least for that tax year.
• Don’t panic at year end: Thoughtful, long-term planning beats rushed, last-minute moves every time.
• Always verify advice: If a CPA tells you something contrary to established IRS rules (like skipping depreciation), get a second opinion.
• Check the show notes: The hosts repeatedly mention a downloadable “Year-End Tax Checklist.”

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For further information and more resources, visit:
www.TheRealEstateCPA.com/Podcast

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Transcript

[A]

You're now listening to the Tax Smart REI Podcast, the number one tax podcast.

[B]

For real estate investors.

[C]

Your source for.

[D]

All things real estate accounting and tax. Here we reveal our secrets that can save you thousands in taxes, streamline your accounting process and help grow your business. Stay tuned to hear insightful interviews with industry experts, successful real estate investors and current clients on what strategies they use to grow their business and how they steer clear of Uncle Sam.

[A]

Hey everyone, thanks for tuning in to.

[B]

This week's episode of the Tax Smart REI Podcast.

[A]

Today Nathan and I are going to be taking questions from our Tax Smart.

[B]

Investors Facebook group, our insiders community, and then some select frequently asked questions we've been getting here around year end. Not all the questions going to be here on Focus. Going to try to make sure we hit some of those for everybody who has kind of those, those year end things on your mind. But there'll be some general real estate questions that they can use sprinkled in, so stay tuned for all that. Also, we're gonna have a special announcement on next week's episode, so you definitely don't want to miss that one. We'll be diving into all these questions in just one minute.

[A]

It's that time of the year again.

[B]

The New Year's right around the corner.

[A]

If you've been listening to the podcast.

[B]

All year thinking I really need to.

[A]

Get proactive about my tax strategy, then.

[B]

This is your moment.

[A]

Because the truth is, you probably don't even know how much money you're leaving on the table. At whole cpa, our team helps real estate investors and business owners save thousands of dollars through proactive year round tax planning. Whether you're looking to optimize cost segregation, leverage the real estate professional status or short term rentals, or structure your investments for maximum tax efficiency, then we've got you covered. But here's the deal. Spots for new clients are limited as we approach year end. So if you want to lock in your strategy before tax filing hits, don't wait. Check out the link in the show notes to request a consultation and start working with our team before you miss another opportunity to keep more of what you earn.

[B]

And we're back. And you know Nate, we're getting to the end of the year here. It's currently this episode is going to be coming out late December. Excuse me, late November. Sorry everybody, late November, not quite in December yet. And you know there's a lot of things people keep asking about around year end. We did our year end episode already this year, but really excited to dive into this.

[A]

All right, so before we jump into.

[B]

The first question, just want to remind everybody that we do have a year end tax checklist that you could find and use it as you kind of go through your year end tax planning. The link is going to be in the description to the show notes, so be sure to check that out. But we're going to go ahead and start with the first question. All right. And this is an important one. And this is came right from our tax smart investors Facebook group. My tax preparer does not believe in taking depreciation on schedule E for my rental property. She insists that depreciation is only going to allow me to take a percentage while taking other deductions on the schedule. Is schedule E more beneficial and will that give me a larger tax deduction? Any thoughts on this? I prefer to take both deductions and depreciation, but she insists on not taking depreciation.

[C]

Thanks in advance.

[B]

So Nate, do you want to take that one?

[C]

Yeah, it's so interesting. I like, look, as long as this is property that was rented out for the tax year or at least had the entire time was like a full time rental, no sweat. You should be able to take that like long term rental, short term rental, whatever it is. The only thing your tax preparer could potentially be thinking about is the vacation rental rules. So if you stayed at the property, didn't work at it, or something like that, then maybe that's what they're thinking about and saying, oh well, you can like certain deduction starts get limited. Right. Once you have personal use days. Right. Now personal use days aren't days that A, you spend before the property's place in service or B, when you are only hanging out and enjoying the property, not actually doing work, physical labor or something like that. Right. I was talking to a client earlier this week and he's like, oh man. I said stay at the property. It's like, well, did you work for? He's like, oh yeah, I only work at the property when I go down. I only spent. I like spend the whole time working. Oh, no problem. If that's the case, you worked at the property when you stayed there and you was fully rented the entire year. There shouldn't be any limitations. I'm not sure where they're going with this, but depreciation is basically based on that long term schedule of 39 years. So there should be no limit there, in my opinion. What do you think, Tom?

[B]

Yeah, yeah.

[A]

I mean, at the end of the.

[B]

Day you have to take depreciation. It's not really something for your accountant to decide whether or not you take it. If they don't take it, they're. First of all, they're not preparing your tax return the right way, so they're. They're already making a big error, and you have to take it. It's not something for your tax preparer to decide. They're doing you a disservice, and it can create issues down the line. So if they insist on not taking it, then I would insist on finding another tax preparer. Okay. That's the harsh truth right there. All right, so we got a few more questions. We've got a lot of them actually coming in. This one's a pertinent year end question. So do I need to do a cost segregation before the end of 2025 if I want to apply it to a 2025 purchase?

[C]

Great question. The answer is you don't need to do it by your end. Right. It's actually really easy. You just need to be done before you file your tax return. That's the key here, is that it needs to be done. If you want to claim on 2025 tax return, you just got to have it in hand, given to your tax Preparer, preferably before April 15th. Right. You can't just show up on April 15th, give it to your accountant's doorstep, and like, hey, here's my cost seg. Can you apply this now? It's a little too late for that, in my opinion, but it's okay if you get it early January, early February, something like that. Right. So no sweat there. That's not an issue. All right, cool, cool, cool.

[B]

And a related question that we get frequently. Nate, I know we covered this on another episode, but it's probably worth covering here. We understand that there's, like, 2025. There's a weird timing issue with January and when people can qualify based on the construction of their property or when they put it on a contract. Can you kind of break that down just to kind of help clarify for everybody who might have purchased the property?

[C]

Yeah, that's a great point, Tom. To a great point. And it's an unfortunate circumstance that happens for just this year. Right. We never have to worry about this ever again. Hopefully. But at least for right now, we have to worry about it again. Basically, we have this weird January 19th cutoff, right? So if you purchase a property before January 20th, you are probably stuck under the 40% bonus appreciation rule. Why? Because that's just what the law says now. Now we start getting to some Convoluted facts, right? So let's say you sent an offer on a contract, everything was signed before you didn't close. Right. This is the key that you did not close before January 20th. Right. You can have lots of things in writing, lots of things basically saying, hey, I have the intent to purchase this property before January 20th. As long as you can walk away from that, right? When being able to keep all of your escrow, everything from that nature, right. There's no penalty for you to walk away, which is pretty common for most real estate deals. Larger real estate deals have our different in that circumstance, but you can walk away and there's no what we call a binding contract. Then you will be able to claim bonus appreciation so long as you close January 31st. I have a client who they had an offer in December, lots of negotiations going on, and then they didn't actually close until January 28th. And so because of that they are eligible for 100% bonus appreciation while someone who closed on January 19th would not be eligible. So that's the key there. There's some other weird construction rules, right? It's like 10% of how much you incurred, right? How much cash we paid out for your construction cost. If you did that before January 19th as well, you're still trapped under the 40% bonus appreciation rule. But there are options that we can use to maneuver around that with a component in election that allows us to potentially still be have some portion of that building be eligible for 100% bonus.

[B]

Okay, so just a quick follow up on that. Let's just say that I bought a property, for example, a client out here bought a property, let's call it September 2024, right?

[C]

Yeah.

[B]

Raw piece of land. They start construction, let's call it October 2024, they complete construction February 2025, they placed into service March 2025, for example. How does this impact that situation?

[C]

Great question. So like the land purchase, that doesn't matter, right? So no sweat there. But it sounds like you probably incurred greater than 10% of your costs by starting the construction in October. So that means you're going to be stuck under the 40% rule because it's a and test in the law. It's an acquired and placed in service after January 20th. And so in that case it's viewed as being acquired, the construction property being acquired in 2024 and then placed in service in 2025, which gives you the 40% bonus depreciation treatment. But work around, right? So you might be able to use 179 here to expense that depending on type of property it is. If it's like a multifamily, probably unlikely. But if it's a non residential property, like a short term rental or even a, a commercial square or something like that. Right. That might be possible.

[B]

Gotcha, Gotcha. Okay, we have a bunch of questions about this in the Tax Smart Facebook group. So it's clear that all up in one shot. Really appreciate that this is important for everybody who's in those situations. If you're considering year end tax moves. Just important to understand what you're up against here, kind of what you're facing. All right, so someone's about to acquire short term rental property. Long story short, they're about to acquire short term rental property here towards the year end in November. One of the issues is that as part of the deal, the seller is going to live in the property for a period of time after the property is acquired. Now they want to try to use it as a short term rental. Okay. And the question becomes, how is that treated? Just to put things simple, say I sold you my property, you're going to buy the property, we're going to close on November 30th and I'm going to live in there until, let's call it December 7th. How does that impact their average period of customer use, if it impacts it at all?

[C]

Yeah. So like you said, Tom, just to reiterate the facts, right, so you buy a property, someone's living in it, but the moment they move out, you're flipping that thing to a short term rental, Right. It's immediately going on. Airbnb, you've got everything set up, just hasn't been listed yet, unfortunately. That person is going to really hurt your average day save and so they're going to probably push you into the midterm rental standpoint. Now maybe if you're doing this like you're doing this like let's say October, right. Like you did this in October, you're probably going to be in a tough position and you won't be able to use the tax losses on your 2025 tax return. 2026. You should be able to, I think. But if you did this, let's say, let's say you purchased this property in January and someone's going to stay in there for two months and then you have the rest of the year to rent it out. Short term rental, that might be a way to get your average day saved down much lower.

[B]

Yeah. Is that count as personally used or is it, is it more like Is it a rental period? Like, I guess have a consideration, right?

[C]

That's a good question. Yeah, it's a, it's a really good question, Tom. I would honestly say that's probably in my opinion because like, I bet somewhere in the contract, right, there was a credit, there was a reduction in the price for the rent. Right. That would have been associated with it. So I wouldn't consider that personal years. I would consider that rent a days. Right. So the property is technically placed in service in 2025, but you're just going to be stuck probably with a long term or midterm rental for that year.

[B]

Okay. Okay. It's important for people to know because I know a lot of people are trying to close and you know, if you're trying to close quickly, that might be something that's part of the deal to make that happen. So just good to know.

[C]

All right, Tom, I've got some questions that I've seen come up recently for you. So a lot of people get really confused when it comes to like short term rental hours and real estate professional hours, right? And so they like confused like, hey, so like I can count some hours up here, but I can't count my material participation hours. And like, so one person specifically asked yesterday, can I count my short term rental hours as a real estate professional hours. But when it comes to material participation, I can't count my short term rental hours and my long term rental hours together. Is that right or how does that work?

[B]

Yes. So this is how it works. Let's break this down, right? So in order to qualify as real estate professional, you need to spend more than 750 hours and more than half your total work time in a real.

[C]

Property trade or business.

[B]

Okay. There's 11 real property trades or businesses, including rental activities, property management, construction, development, basically fix and flipping, all this time stuff falls under rental activities, things like that. Now back in 2021, so I'm going to back this up before 2021. There's a lot of confusion. Does like a short term rental or a hotel or motel, is that a real property trader business? And that was clarified in the update to the regulations that came up around that time and the section that regulates this section, Reg. Section 1.4 69 9, if I'm not mistaken, is what it is in there. They've updated it to include that motels, hotels and similar establishments, AKA short term rentals are indeed a real property trader business. So what does that mean? That means that the hours you spend on your short term rental can count towards the 750 hours required to become a real estate professional. However, the purpose of doing the real estate professional size is not to get short term rental deductions. You can do that with the short term rental loophole strategy. Whatever you want to call it, you don't need reps for that. But what you do need to do for your long term portfolio, long term rental portfolio, is you do need to materially participate in your long term portfolio. So let me break that down and give an example, right? Say I run a short term rental business, right? I spent 800 hours running my five short term rentals. Hypothetical, right? Great. 800 hours is more than 750. And say that's the only thing I do now I'm at 850.

[C]

Great.

[B]

I'm a real estate professional. Fantastic.

[C]

Awesome. Great.

[B]

Now if I do have a long term rental portfolio, say I have a portfolio of long term rentals, right? If I spend zero time on those long term rentals, zero time, Then yes, I'm a real estate professional because a short term rental help me get there. But I've not materially participated in my rental activities. And we all know that short term rentals are not rental activities. So you've not satisfied the material requirement on your long term rentals. Okay. It's the same thing as if you were to be a real estate agent and you were to work a thousand hours in a real estate agent. Boom, great. You're a real estate professional. You still need to materially participate in your long term rentals. So to answer the question to be concise, the short term rental hours will help you get towards that 750 hour requirement in order to become a real estate professional. But it will not help you on the material participation of your long term rental portfolio. You still need to meet one of the material participation tests. Oftentimes a long term rental portfolio is going to be that 500 hour test more often than not on your long term rental. So it's kind of a lot right there. But I hope that kind of made sense.

[C]

Yeah, explain that beautifully, Tom. And like it's like all bourbon is whiskey, but not all whiskey is bourbon. Right? Like that's like how I think about. Is it like, hey, all my material dissipation hours count for reps, but not all my reps hours come from mature dissipation basically. Right. And so it's one of those cases unfortunately that we see sometimes where someone's like they crush rep status. Absolutely. Like no, without a shadow of a doubt. But then they don't manage the properties because they're so busy and doing so good at whatever they like. They're developing real estate brokerage or whatever, it winds up being right. And so like I don't have time to manage my properties. Yeah, that's where it gets tricky and that's where maybe it's like, hey, I've had a lot of clients right now it's like, hey, I'm going to grind really hard one year for real estate professional status and then after that maybe take a break. Right, Take a little bit of break. And so look at property management companies or something of that nature. There's a lot of opportunities there to, to explore those. But I thought you did an excellent job, excellent job explaining that, Tom. Really, really do.

[B]

Yeah, no, no, appreciate that. So for everybody who's wondering how that all comes together, there you have it. But yeah, that's, that's how it works.

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[B]

Link in the show notes.

[A]

That's it for now.

[B]

We'll dive right back into today's episode.

[C]

Tom. So actually a follow up almost to that question then is so someone wants to start using syndication losses, right? They want to start using syndication losses. So how can they do that? Right? Is there a way that they can start snagging like they look at different syndications, they invest in them, they know they're going to get depreciation, but they want those losses to be active. How is the best way for them to do that and what is the test they need to achieve to accomplish it?

[B]

Yeah, it's a great question. Especially around year end. People who can qualify with this usually want to try to get some syndicates to do it. So let's break down how this works, right? So first things first, losses from your syndicate investments will be passive by Default unless you qualify as a real estate professional. So first you have to qualify as a real estate professional. 750 hours and more than half your total working time in a real property trade or business. We just discussed kind of how to get there. And you also need to materially participate in your own long term rental portfolio that you own and control, right? So I'm going to give two different examples here. Okay, the first example, if you only own rentals, say you only own rentals, you have a portfolio of just say five multifamily properties just to kind of pull something out of a hat there and you, and you hit 850 hours of material participation on your long term rentals, okay? Now if that's the only thing you did, you now qualify as a real estate professional because it's more than 750. You've also met the 500 hour material patient test on your rental activities on the way to your 850 hours, right? So you check that box. Now because you qualify now because you hit 500 hours, it does not matter how much time anybody else spent on your portfolio. So what you do is you make a grouping election, okay? You make the reps grouping election under 1.4 C9 9G and after that you make that grouping election and what that does is now all of your rentals are treated as one. So if you do invest in a syndicate that is a rental property that's now grouped in with your long term portfolio, you've hit the 500 hour material participation requirement and you're good to go, right? So that needs to be true. You always need to do that. Another example, very similar example, let's say you're a real estate agent, you spent a thousand hours this year being an agent. You hit real estate professional status and you have a long term rental portfolio.

[A]

You still need to hit the 500.

[B]

Hours on the long term rental portfolio, right? In order to mature in your long term rentals. Then you group it in and do it. So the bottom line is in order to use losses from your sending fund investments, you need to a qualify as a real estate professional and you need to be ensure that that you hit the five hour or more material participation in your own direct holdings, make the grouping election and then you're good to go.

[C]

Boom. Yeah, that's great Tom. So like just, just kind of recap. Everything Tom said, which is really well explained was basically look, if you can spend 500 hours in long term rentals and also hit rep status, right? So got to get 500 and then 750. If we can do that, then we can start grouping syndication investments with everything else. Right. Not have to be active in those or get, get those to be active per se. So it's not an easy test. It's very difficult to achieve. But if you can achieve it, I had some clients been able to do it. It is achievable, but it's just not the easiest path in the world.

[B]

Right, right, right. We get this one all the time. I can't tell you how often we get this. I thought we disbanded this myth or whatever, but it just keeps coming back. It keeps coming back. So we're about to purchase our first short term rental and I spoke with a reputable company and something caught my ear. They said we cannot use the short term rental loophole to offset our active income if there's a property management company in place. It only works if you self manage. Is that true?

[C]

Oh, it's a great question, Tom. It's. Look, here's what I'm going to say. It's really, really hard to make that work. Right. And the reason why is because it's going to be really hard for you to spend 100 hours first off, right. There's not going to be a whole lot of stuff that you're going to be doing because a property manager is going to be doing all of it. And then you'll spend more time in the property manager. Are there times that you might spend more time hours in the property manager? Right. It's your business, you're the one setting up the furniture, maybe doing a lot of that work. Is it possible? Maybe, but I'm going to say it's highly, highly unlikely. Plus a lot of the time that you're going to be spending what we call investor level hours. Right? Those investor level hours that's basically paying the mortgage, doing the bookkeeping, all that type of stuff that's not going to qualify because you've got a property manager, you're not in the day to day operations anymore. And so because of that, that time does not qualify. And so can you make it work? Maybe. I say maybe like 2% of cases that I've seen actually can make it work. But 98%? Probably like more like 99%. No, you're not going to be able to do that.

[B]

Right, right, right. Makes a ton of sense. So yeah, basically, long story short, if you don't have a property management company, it makes your life a hell of a lot easier. For lack of a better way to put it. You have a property Management company, you're walking a tightrope kind of, you're working a thin line and you have.

[C]

But guys, a lot of times this stuff is like it's one year hit, right? We're totally okay if you decide to get a property manager the next year, right. Maybe it's too much to handle. Maybe it's just a lot of lift. Maybe your life changes, right? Things happen in your life. I've had clients where hey, life circumstances change, right? We have family issues, work issues, who knows, whatever happens. And so you get pulled away from doing the work initially. So now things have changed. That's totally fine to get a property manager and have them help with that. Right. But however, the more you're active, the more you have the ability to actually be able to use these tax losses. And so it's worth making the analysis saying, is it worth for me to do as much work again this year? That's a question you gotta ask and probably need a CPA to run that by.

[B]

Yeah, yeah, for sure, for sure. This is something you definitely want to dot your I's and cross your T's on. Without doubt. All right, we got another question here. I have a 13 year old that helps clean and paint our properties upon turnover. I was told that my business could pay my children through payroll for tax write off. I was just curious if being under 14 would limit the hours or jobs that she has available to do.

[C]

Yeah, technically, yeah. I mean, so like, like look, a 14 year old isn't really being hired that frequently in the outside workplace. Right. So they're gonna be very limited in what they can do for you. And so generally what we kind of think about when we think about this is that you need to have someone that like you need to give them jobs and responsibilities that are going to be associated with a someone that's much younger. And so it's going to be basically probably minimum wage type work, which is fine. Right. Just find out what that is in your county, your state, whatever it winds up being and figure out what that minimum wage is and then you can pay them. But just FYI, you need to have contract, you actually have a movement of cash and you need to also file your W2s by January 31st. That's coming up very quickly. Right. So make sure you have all that stuff documented and if but they're below 14 and you pay them less than like 14 hours or whatever or versus less than the standard deduction is, which is around 14,000 now, then that is tax free to them. And then you, of course, get the cool sweet benefit of putting up to a Roth IRA for them. Now granted, the most I've really seen from clients who do this legitimately is around two to three thousand dollars a year, right? That's not nothing. Just FYI that the compounding investments and returns doesn't really stack it up over a long period of time. But legitimately, you're not going to get to that $14,000 number, in my opinion. But that's just my thoughts.

[B]

All right, one more question here on our one. We have questions for days, guys. By the way, just one more I wanted to highlight. We get this question quite frequently. Can I buy a condo and use it for bonus depreciation? If you can't depreciate land, but if you buy a condo, can you just depreciate the entire amount? That's the question.

[C]

Yeah, we get this, Tom. So much, Tom. It's like, it's like, I feel like it's, everybody's like hacked, oh wait, if I buy a condo, I don't own the land, right? Like the Associ association owns the land, so I don't do it. Or it's like 20 stories up and it's like, well, tax court, it's like, it makes sense, right? I totally get the logic behind that. It makes sense. But the ultimate issue is the fact that tax court says you probably own a piece of the land at the end of the day and you probably own someone of the land or something like that. Ultimately, therefore you probably need to have at least some small portion allocated to land. Maybe it's 10%, maybe it's 5%, right? Like we can help you do that type of analysis and figure that out. But ultimately you got to have something to land. Now, not saying that you can't do a good chunk of it. Also, one thing that I've talked with costly companies about is that a lot of the 15 year type property, right, that qualified improvement stuff, that's going to probably belong to the condos. You're probably just going to get a bunch of five year property, which isn't bad, right? But like I said, it's like everything from the outside in is yours, but everything on the outside belongs to the condo association. So just FYI.

[B]

Okay, okay, cool, cool, cool, cool. So yeah, we get that question all the time. Glad we were able to clear that up.

[C]

So, Tom, one question I actually get a lot and we're really starting to see end of year right now is a lot of people saying, okay, I'm stuck with A medium term rental, right? Your question, like earlier, the question that you read talks about someone who, they're probably not gonna be able to hit the seven days or less average. But they're like, okay, I've heard about this 30 day lesson average. I want to provide whatever I need to so that I can get this property active, right? They really want to get this property active. What do I need to do to qualify for that? Right? Like I've always heard that, like I need to go clean the property and stuff like that. What else do I need to do to make sure I can achieve this at less than 30 day average?

[B]

So what do you need to go out and do to be able to qualify for that? They actually need to provide substantial services, right? That's the key. A lot of people, I've had people ask me in the past, well, Tom, if I offer substantial services but don't actually provide them, does that work? And if you look at the regulations, I don't have them pull up in front of me. It says that they're going to take into account. So this is a kind of a subjective up for interpretation, but to me it's relatively clear. If you, if you read it, it says they're going to look at the continuity and the frequency and how substantial the amount of services you're providing actually are. So it indicates that it needs to actually be rendered, right? Simply offering the services to people is not enough. They actually need to be performed for your guests, either by you or somebody who is, you know, running your property. They actually need to be performed. Merely offering them is not enough. Now, what types of services are typically considered substantial services? Well, think about what's provided in a hotel or motel, right? Daily cleaning while you're there, right? You go out for breakfast and you don't put a little sign on the door. Somebody comes in, they clean your, your unit, right? Or they provide you the meals. You go down to the hotel lobby and you get breakfast. So if they're making breakfast for you, that counts. Concierge services, if they're doing your laundry for you, if they're coming in and they're bringing your stuff to you, they're making everything very concierge, right? That's going to count. Again, things that go beyond merely renting the spot, right? If you think about your typical Airbnb, if I go rent an Airbnb right now, I'm going to go rent it out, I'm going to show up and I'm going to open the door, I'm going to Live in the unit seven days from now, six days from now, whatever it is, I'm going to leave, someone's going to come and clean. If I'm at that Airbnb and someone's coming and cleaning every day while I'm staying there, that's usually an indication of substantial services. If they're making breakfast every morning or providing breakfast for me every morning, that'd also be considered substantial. If I'm having them come and pick up groceries from being delivered to their house, and I'm not talking about Uber Eats, I'm talking about they're having that facilitated on your behalf, that could be considered substantial. If they're providing vouchers and things like, oh, we're staying here, here's a voucher to go to the local theme park down the block, or whatever the case may be, that could be considered substantial. So those things actually need to be rendered and performed. And I think there's a level of common sense here that we can all use. Right. If you're merely offering these things as, like, kind of makeup to make it seem like it, it's not going to work. You actually need to be providing it. And typically, in a typical business like this, it's either you or you're not. So, Nate, I don't know if there's anything you want to fill in there, but to me, that's how it works in a nutshell.

[C]

That was great, Tom. It's like, like, basically, like, I think about, like, so like a hotel is probably, like, maybe a step too far from Airbnb, but a bed and breakfast, right? Hey, you have the ability. Hey, you can sit down. Yeah, bnb, right? Something like that. But it needs to go above and beyond essentially, then, versus what? Like, hey, oh, I can come clean, right? Oh, I can come clean if they want me to. It's like, no, no, no. You have to show up there and say, hey, how's your day going? I'm here to take out all the trash and turn over your sheets. Right? It can't just be that either. It's got to be. There needs to be a lot tied to it. Look, it's a lot more effort if you, hey, it's going to increase your rents and your rentals. Do it by all stretch of the imagination if you can make it happen. But it's going to be really hard to do it. So I wouldn't just do this for the tax effect, so. But when we get common, we get off the time. So. Thank you for answering that one.

[B]

Yes, I know There's a lot of people who have, who eclipse that seven day stay or looking for that as maybe the catch all. But there's also a dark side to that too. It does expose you to self employment tax. So it is something to take into consideration. But yeah, it's relatively straightforward and I think, you know, you see why the seven days or less is the more popular test because there's no extra effort needed, you know, beyond, you don't need to provide services or anything like that. But that's it for that one.

[C]

Nice. Now Tom, I know one thing we start get looking into is what should people be thinking about for year end, right? Is it like hey, what we're getting, right, We've had our episode, if you want to go back to it, go ahead and look at that like that year end episode of what you should be doing now to plan for your end. But like what should people do? And again check the show notes and then below we've got a checklist for you guys. It's free resource so please download it and take a look at it. But basically what should we be thinking about for this year? Look, if you're doing anything in real estate, you have a timeline. You'd be looking at that time log and getting that active and getting that taken care of, right? Finish that up. Don't do it. January, right? Something in January. We all have the issue like okay, now I'll do it and then I'll start doing next year. Look, be on top of it. We all have struggle, we all have struggles and issues being disciplined and working on that type of stuff. So just try and be on top of it. At least try and start doing it now versus later. That way it's more easier for you to recall certain types of items. Maybe use an app like Toggle or something like that. That way you can start tracking your hours a little bit better. You can input it that way too. It's electronic, etc. So you're not going to lose it, not going to get destroyed or anything like that. So that's one thing to think about. The other thing to think about too is charitable donations, right? That's another way like look, if you want to give to an organization, I'm always, I'm always applauding that. I think it's fantastic to do. And so one way you can do that is what we call bunching, right? So if you want to basically. So a lot of people tithe, right? A lot of people do tithe and they do 10% of their income so if you do 10% of your income and then let's say instead of doing 10% in 2025, you decided to do 20% in 2026. Right. And that means now you might be able to take above the standard deduction. And that means you actually get benefit, you get more of a tax benefit. It could be 2 to $3,000 tax savings. And that's like, that's not nothing. I'll, I'll take that all day long personally. So those are some of the things that like, I think people should think about 401k contributions. Tom, what are some things that people should be considering for your end as well?

[B]

Yeah, I'm actually going to take a different approach to this. So a lot of people, we're seeing a lot of people here and everybody know I understand the urgency, right, to get a lot of this stuff done by year end, right? You want to purchase the short term rental here in November, December, get that place and service, meet the material participation requirements, get two or more rentals in there, seven days or less. So you can qualify. And if you can do that, by all means do it. But if you can't, don't force it. Take a deep breath, right? Bonus depreciation is not going anywhere, okay, for at least the next four years, right? It's written in permanently, but you know, things can change. But for the next four years, probably not going anywhere. So if you can't get the property in 2025, it's okay to get into 2026. Okay? So take a deep breath, okay? I understand that might not save your 2025 tax situation and sometimes that's just the way the cookie crumbles. But basically I'm saying it's a year end consideration that is something to consider, right? Can you reasonably get this done between now and year end and meet all the requirements and do it above board and make sure you're checking all those boxes that need to be checked? If so, then yes, do it. Absolutely. But if you can't, don't force it. Don't try to take shortcuts, don't try to, don't try to make that, don't make bad investments just to try to get some tax benefits before year end. Take a deep breath, realize that next.

[A]

Year, hundred percent bonus appreciation still here.

[B]

Guess what? In 2027, still here. 2028, still here. 2029, still here.

[A]

2030, still going to be here, right?

[B]

So take the deep breath, realize that you have some time and don't force something at year end just for the tax savings, that's my year end takeaway.

[C]

That's a great way to frame the fact you need to, like, look long term. Right. We're not looking at like what we can do right now. Right. We don't want to be too short sighted. Hey, if we can do stuff right now, awesome. But like you just were saying, that's a longer term approach and say, hey, if it's more feasible and more flexible for us to do it that way and maybe have better opportunities, I think that's a great way to take a step back. Right. Take a breath, do a little meditation for a second and actually evaluate whether or not you need something this year, if it's okay, if it falls into next year. Right. No, I totally agree with you on that. Right, right.

[B]

Take this a step further. We have a lot of people wanting to work with us for tax strategy and planning, and we'd love to work with people and we can help them. And I feel like so many people are like, oh my God, I have to do this this year. Again, take a deep breath. This is about the long term. Okay? Real estate is a long term game. Right. And yes, you do want to try to capitalize on the short term when you can. Absolutely. Don't get me wrong, but zoom out a little bit. Take a deep breath. Realize it's a long term game. Don't jump into things just for one year's benefit, you know, don't select a CPA firm just for one year. Right. Okay. This year, this group's going to help me get this deduction this year. And think about the bigger picture. Right. You don't want to be changing CPA firms every year. So a firm it makes sense to work with for the long term, zoom out, think about the big picture. That's my takeaway.

[A]

That's.

[B]

That's my bottom line.

[C]

That's great stuff, Tom. Great advice. I really agree with that.

[B]

Okay, Nate, any parting words year end that you have?

[C]

No. I can't beat what you said, Tom. I can't. I can't beat that. It's like, hey, take a breath, take a step back, and let's really evaluate what makes sense for this year. Obviously, if there's like some. A few minute, last minute things for retirement, contributions, charitable contributions, we can do that type of stuff. But really big, life altering decisions, we should definitely say, hey. Let's take a step back and say, hey, does this make sense for our wealth and for what we're going to do for this year? And maybe it makes better sense to do next year.

[B]

Yeah, absolutely. And just again, as a reminder, there is the Year End Tax Planning Checklist. The link is in the show notes, so go ahead and check that out. Next week we're going to be back and we're going to have a special announcement next week. It's going to be big. You do not want to miss next week's episode. I'm really excited for that. So for everybody, thanks again for tuning in. We'll catch you next week on the Taxpayer REI Podcast and have a great rest of your week.

[A]

The Tax Smart Real Estate Investors Podcast is for general information purposes only and is not intended to provide and should not be relied upon for tax, legal or accounting advice. Information on the podcast may not constitute the most up to date legal or other information. No reader, user or listener of this podcast should act or refrain from acting on the basis of the information on this podcast without first seeking legal and tax advice from counsel in the relevant jurisdiction. Use of an access to this podcast or any of the links or resources contained or mentioned within the podcast show or show Notes do not create a relationship between the reader, user or listener of the podcast and the host, contributors or guests. Any mention of third party vendors, products or services does not constitute an endorsement or recommendation. You should conduct your own due diligence before engaging any vendor. For more information, reference the show notes or description of this episode.

[D]

Thanks for listening to today's show. If you enjoyed the show, please find us on itunes and leave us a review. You can also email [e-mail] with any feedback or topic suggestions. We are always taking on new clients and with the new tax laws in play, you really don't want to navigate this alone. Let us help you save money on taxes with your accounting and CFO needs to become a client. Navigate to our client [e-mail] and fill out a web form with as much detail about your situation as possible. Thanks so much for listening. Have a great rest of your week.